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tv   Today in Washington  CSPAN  December 11, 2009 6:00am-7:00am EST

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so what we have done is to say r >> is that correct? >> i don't think i would say it quite that way. the law of the land is that the supervisor is responsibly for setting the term exit. >> to show you you know a few things about how they are doing. >> as they exit, we'll do it as quickly as we can and leave the capital position stronger, not weaker. >> in this regard, bank of america is now in process.
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it will be a little hard to follow the steps in which they are doing it. are they repaying all of the tarp money and have they repaid the capital to do it. . . i got a check for $45 million last month. >> i'm interested in what the source of the funds for the check is. >> it was put in my comment that i would be happy to let the fed responded the tell. i think it is out there clearly in the market. i think the details are all out there. >> but, the policy appears to be, according to what one reads out in the public, the policy appears to be raised inequity.
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all of the money necessary to repay, not a portion. is that your understanding? >> i think that is generally a desirable approach, because desirable approach, because clean-air exit is better than staged exit. i'm not sure that is going to be possible in every circumstance but i think again it is a good thing when these institutions are eager to go out and have private investors come out. >> mr. secretary andrew, a reporter for "the new york times" to judging by his book seems too often no more than we do, has written about the bank of america's repayment, that ," it will take too long-- he expresses himself. he said basically two things. the fdic didn't think they should be allowed to repay and two the reason why they were so eager to repay was so they could increase their executive compensation that could be offered to the successor and it
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would not inappropriate for me to do that. on the second question, i think you are absolutely right to compensation restrictions would be put in place for firms. they are very tough restrictions and they were properly tough restrictions, and for that reason, but for many other reasons, and again because you can do it in stronger in the eyes of the market. deese thanks rigor to, rhee pay and i think we should welcome that and encourage it and i expect to see it substantial bit more that ahead. >> i'm not going to press you to reveal perhaps what you feel is compliments but it strikes me as a matter deep concern at the fdic does not agree with along the repayment because the bank is too weak. my time is about to expire so i'm going to express further thought then pressing e1 this.
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effectively, the strength of treasury and the regulators sense that the premature repayment on these banks are weak is that for the country. that is an extremely important thing. >> we would not allow that our support. >> i want to encourage and bolster your viewpoint there and i would be deeply concerned if those kinds of considerations were overridden the matter how well meaning, any desire to increase people's executive pay. >> again we would not support that and i think the agreement esau in that context strengthens the institution very substantially. the best test of that of course is what happens going forward but to a private investors come in and be willing to put substantial amounts of capital as a sign of confidence and strength.
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>> superintendents neiman. >> we olick knowledge the crisis that was aborted by the impressive efforts, the multiprong efforts by the administration and other agencies and be here words, some of which you use this morning, lastly chairman bernanke characterized what we avoided as a global financial meltdown, magnitude unseen for generations, a second great depression cataclysm. as i stated in my opening, i think really it is imperative that the american public understand the linkage to the real economy as well as what really was avoided. could you share with us your descriptions of the sequencing of what could have played out with the failures of large interconnected firm and a direct linkage to the real economy because they think that really is at the heart of assessing the
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effectiveness of the program. >> in september of last year for the first time i think it, seven years americans across the country were starting to take their money out of banks, banks that were strong, no connection to the weaknesses in the sub-prime crisis because they were scared about the security of their savings. we saw the economic activity around the world come to a stop. markets rose around the world. the value of american savings fell by more than 40%. people were faced with the process of having to work ten years longer. esol millions and millions of americans lose their jobs, thousands of businesses failed that did not need to fail, deeply unfair and the damage to the basic confidence of americans in the fairness and justice of our system. deep loss of confidence around the world and our basic financial stewardship of this country. it is not something that is
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about a set of individual institutions. it is about the basic fabric of confidence in america, the basic security americans have in their future. when you allow that to suffer so much damage as you are saying, it takes a huge amount of time to repair that basic damage so financial crises are unjust and amatic because they cause deep damage to people who were careful and prudent and had nothing to do with the crisis and the scars that creates are long-lasting and we are going to live with, for a long time, the challenges in trying to repair that damage. >> thank you for that. one issue that is also addressed in our report issued yesterday are issues around moral hazard and we have debate among the panel itself as to the extent that t.a.r.p. increased the risk of moral hazard. i think moral hazard was almost built into the fact of the
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emergency efforts, the fact is will the government always be there. i think you just explain the criticality of why the government had to step then and why i think your position, which i also agree with, is that to address the moral hazard we have to address to big to fail and that is an imperative for our congress, which they are debating currently. is strongly agree that the need for systemic regulator and the resolution authority but i would like your views on whether we should be in effect allowing institutions to grow to such large nets and complexity to be characterized as too big t fail, and is in that time to engage in a debate in this country now that we all recognize that the safety net that there is for institutions, the benefits that the financial institutions come in
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particularly depository institutions have from fdic programs, from the fed as a lender of last resort. is the time to debate what we want our institutions to be? are the social utilities that should be able to engage in speculative then high-risk activities? >> i agree with everything you said. a tragic choice in the financial crisis is to solve the problem come up put up the fire and protect the innocent and limit damage. you have to act. you can sit there and hope it is going to burn itself out and if you worry about moral hazard to much, as you saw, this is the story of the first 18 months of this crisis, deacons c enormous pain and damage, and what it takes to clean that up will cause much more moral hazard sophie care about moral hazard you have to care about having basic protections to prevent penikas from spreading. it is a paradox. people tend to think if you care about moral hazard you should
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diggins the fire station but if you don't have the ability to act, as you saw the damage is so sweeping and dramatic government will have to do so much more in such a broader scale with much greater cost to incentive so is a great case for emergency authority. we are having a debate about too big to fail and we have proposed a sweeping set of new authorities in constraints that reduce the risk that thinks in the future take on so much risk that they could imperil the system and we are proposing an ability to allow them to fail with less damage to the system and less risk to the tax there as a whole. we have a debate in the congress, which is very welcome. >> thank you. mr. atkins. >> that is great. kayaked the one to pick up the threads of this is a good segue to really talk about ways in which the wing forward now with the remaining months of t.a.r.p. you intend to use them. my friend from the united autoworkers here has been.
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of course supportive of t.a.r.p. because $80 billion worth of the gm chrysler and gmac. >> i work for united autoworkers. i don't know what you are talking about. >> the solution of small-business lending which were suggesting but one thing i wanted to focus on was, as far as treasury's use of the funds going forward and how it is going to be allocated. i think that has implications, dimensions the proposals, the administrations proposals for new statutory authority for resolution and for systemic risk regime. and basically i guess the way ifq the resolution authority is really just the codification of t.a.r.p. for the years to come because the flexibility built in. we will review how the treasury has interpreted t.a.r.p. over the last year and now by the
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sounds of it if we are talking about job creation or whatever else is coming out from the administration. exactly what sort of uses are you going to put these funds to because you have said sort of both sides, now you want to keep some in reserve, you put some in community banks and i guess i don't really understand. >> let me start with the job creation question and let me say it as well as i can. because of what we have been able to achieve in terms of stability in the system, there are at least $200 billion in lower costs ahead. that-- >> because of? >> because we have achieved so much improvement in stability and not now believe that is going to be necessary to suspend a substantial amount of resources because a substantial is gone up substantially. the savings reduce the budget deficit.
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they go to the budget deficit because you cannot use t.a.r.p. to fund an infrastructure program. you cannot use t.a.r.p. to provide a tax cut to small businesses. you can use t.a.r.p. to incent green energy efficiency products. this are choices congress is going to have to make. what we have done the because of the careful stewardship of this program is dramatically reduce the expected costs much lower than anybody anticipated, not just the beginning of last year but in august. that gives the congress and presidents and choices to make about how to use those resources and i believe it will be a strong case for doing that for using some of those resources to support targeted measures that can help get the job creation back more quickly but there's going to be substantial resources to reduce our long-term future deficits. i want to come back for you began just very quickly. the resolution authority we proposed is nothing like
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permanent t.a.r.p. and i want to make this very clear and i would not support that for reasons i think he would agree with. what resolution authority does is allow the government to, in effect, taking institution that is mismanaged itself to the edge of the cliff and in effect put it in receivership and wind it down. not save it, not give it a chance for redemption but to sell and wind it down safely at less cost to the taxpayer, less damage to the public. it is not a chance for redemption. >> the problem is there's so much flexibility. >> i don't think so and again this is very important. the challenge in these things is getting the government some authority to contain financial panics but that has to be very-- [inaudible] >> coming into this crisis united states of america, president of the united states, the only emergency authority he
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has to contain the panic himself in this case, the executive branch before t.a.r.p. was passed in the fannie and freddie legislation was passed was in effect declare a bank holiday and closed markets. that was that.@@@@@@@ @ @ @ @ @, >> going back to the issue of tarp as revolving -- >> left a back to that. >> i would like to have an opinion from the general counsel of the treasury addressing that issue which tests were back in september. we have not gotten there yet. i think that is really germane to what we're talking about as far as how much money has been saved and reallocated. >> i would be happy to provide that. we provide that to the sitting members of congress who asked. i will have to copy you on that.
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congress designed that with the that my prayer it was wise to that. >> i disagree. it really calls on the question -- >> there has been a challenge and -- >>, ok gentleman. like to just make an observation because my colleague miss characterize whom i work for. i work for the afl-cio. united autoworkers-- i do not work for the united autoworkers. i don't have that honor, and but i feel very, very strongly about the dignity of people who work hard physically for living, and i think that is often not properly honored in washington. mr. secretary, i would like to
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touch on, come back to the big bank issues. i am just confused about something and perhaps it is just that i'm not reading closely enough but we pass notes back and forthwith this stuff and they are confused as well. behnke of america has $45 billion in t.a.r.p., in preferred stock. held. bank of america had a public offering of $19 billion but what is the source of funds for the remaining $45 billion the federal government receive from bank of america? the remainder of the 45 billion? >> i think probably i should give you in writing which i would be happy to do. >> there isn't any other equity offering is there? >> it is a little more complicated than that and this is important, leads the capital position of the institutions
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stronger than it was before this, not just in the eyes of the supervisors which is very important and this is what they all agreed on but also in the eyes of the marketers and the creditors. >> are you saying the comment about fdic is incorrect because he said they all agreed on it. >> i was trying to stick with my line which is i'm not going to comment on this issue. , who i believe that it is very important. in of the supervisors believe it is important to make sure that as we exit, i think they share that view and i am glad they do. >> okay, perhaps mr. sorghum is wrong. stronger not weaker, i don't have all the numbers in front of me or can run them in my head but to what extent if any are the funds for the repurchase of the bank of america preferred coming from internal earnings?
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>> i don't think they are, but again i need to go back and reviewed the numbers in detail. again, let's focus on the stuff critical to the financial position of the firm, so the best way is to look at their common equity ratio to assets before the repurchase and after. that measure, which is probably the most valuable measure of financial strength is stronger with repayment, not weaker. >> what i am concerned about-- >> the quality, another way of thinking about it, the quality of capital that has the strongest source of confidence-- >> of course it would be stronger because they have raised, and in payoff for fur. >> that is it, it is the basic strategy and is a good strategy. >> but that of course would happen even if the bulk of funds raised by it something other
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than the public offering. it concerns me that the basic standard appears to be a good one which is if you want out of t.a.r.p. you've got to be able to raise the equivalent amount of t.a.r.p. funds in new equity of the t.a.r.p. fund you are paying back. >> that is not quite the standard. >> explain the standard then. >> again, this is a discussion we should have with the supervisors because under the laws of the land-- >> i know but you know with fairmount about it and you were the only one here today. [laughter] >> i don't think it is as complicated as you are making it. it is a simple thing. common equity before repayment, after repayment, a higher after repayment. it is good for the system. >> it is not clear to me if the common, if you have raised little bit of common equity that mausolea loud prefer to be paid back with cash that comes out of
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earnings-- >> i don't think that is right but i would be happy to ask the supervisors and i'm sure they would be responsive to lay down in detail but we are happy to provide an authoritative report. >> i hope to keep insisting in the future, i can't change with you done with bank of america but i hope he keeps insisting in the future that you have to be able to have the strength to raise the equivalent amount in the public markets and the equity, common or preferred that you are paying back for t.a.r.p. money. >> superintendents eamon. >> i would like to go back to the original dialogue regarding supporting small business lending through expanding capital investments in community banks and i am on record as strongly supporting those initiatives, and i also agree with your assessment of the
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reluctance of community banks and in particular to participate and i think you identified the primary reason for that reluctance, being a stigma. one way to address that reluctance and stigma is to issue those details regarding the program. focusing on eligibility requirements, criteria for approvals, details about the approval process. i think greater transparency in the program in the program was announced i believe october 19th so we are approaching almost two months before the details are issued. i think greater transparency, a full disclosure of the eligibility requirements-- is there a black box that is going to determine eligibility, would go a long way in addressing those concerns and reluctance on the part of the bank so any
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further insight on how you intend to address those concerns of the banking community as well as any projections as to when we may see more details about the application in the approval process. >> again, happy to try and do that. you are a supervisors do you know some of this is tough to beat-maggie can't reduce it to a clear simple set of criteria. is not just about stigma though. is partly the concern about and that is a big part of the deterrence. >> let's talk about lessons learned in developing the details for the program. what are the lessons learned from a large bank capital investments that can now be investments that can now be employed to the smaller bank the program would include a
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detailed lending programs to be submitted as part of that the application as well as ongoing reporting requirements. >> we think that would help. i can't tell you though whether that is going to be sufficient. i think you understand, you can't, we don't want to have the government forcing banks to lend and have quantitative-- fallen so much in the aftermath of a recession, but we think it is a promising approach. i think as you know we are also improving substantially this survey we put in place that would allow banks to report on how they use the funds and what actually happens in different categories of lending and i think that should help too and we are open to other suggestions. >> that raises another important point. can you share with us your assessment and evaluation of the bank lending in terms of both originations as well as bank
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balances? >> you have to look at overall credit to have a good sense of the risk in the credit crunch now. the price credit has come down a lot. bank lending is still falling for reasons you will understand. borrowing from the securities markets for those who have access has increased very dramatically. on net credit is still falling. nor surprise in that of course because in a recession as the economy because the economy has slowed so much contracted somewhat, demand would fall quite a lot of the pace of decline is slowing a bit and if you look at surveys of what businesses say they are saying they do not cite a credit as the principle problem they face. mostly with the faces lower demand for products going forward. >> so when we hear about banks maintaining large balances that the federal reserve earning his bread, is that something the public should be concerned about
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or are we looking-- >> i don't think so. that is just a necessary consequence of the actions taken to help frankly bring unemployment down, and banks are still somewhat cautious looking forward but there is much more capital and the financial system today in the overall system is in a much stronger position to support recovery as recovery takes hold. there are a bunch of charts in my testimony that report on these survey based measures of credit conditions and provide helpful indications of the broad trends we see so i would say dramatically better than it was, quicker than we would have hoped but still pockets of the country still very vulnerable to damaging contraction in credit. >> thank you. mr. secretary we are talking a great deal here about systemic risk and of course systemic risk is what we were talking about a year ago when we got into the business of bailing out large financial institutions and
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particularly with aig. i read the november 17 report of the inspector general for the troubled asset relief programs report. as you know he was quite critical of the actions that you took, in negotiating with the ultimately with counterparties for the aig financial instruments. now, i was struck by two quotes in here. he says that the federal reserve and treasury officials defended the rescue of aig on the grounds of the company's failure "to pose considerable risk to the entire financial system and would significantly intensify an already severe crisis in contributed to a further worsening of local economic conditions which has been the standard story for well over here but the report also states that you told sigtarp that "the
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financial condition of the counterparties was not a relevant factor in the decision to see to it that goldman sachs and other counterparties were paid 100 cents on the dollar. i have to say these two statements appear to be at odds with each other. >> let me try to explain. systemic risk is a complicated, difficult thing to assess and measure. the risk to the system from aig's collapsed is not particularly reflected in the direct effects on its major counterparties. the things that bob protection from aig. the direct effects and this is true for lehman and all the other financial systems that direct effects of that failure were not particularly significant. what was significant for the system as a whole with the broader collateral damage that would it have happened in the event of a failure so what you saw after lehman for example is
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a general pullback or classic run on the entire system. asg presented exactly that type of risk but on some with a much greater skill because aig unlike lehman, unlike bear stearns had written a bunch of different types of savings vehicles to the retail community across the country and around the world and if those, if those policyholders have lost confidence in the system as a whole than the damage could been much greater so it sounds like of course the entire system was at risk and if the system has collapsed no institution in the united states or around the world would have been intolerable to the collapse. >> mr. secretary if goldman sachs could have withstood these losses-- >> only the direct effects. is not the right way-- >> they still could it paid off all the parties in turn that they owed money to. this will not cause goldman sachs to collapse.
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>> chairman, you understand this. when you decide it is necessary to prevent default, you prevent the fault. if aig had not met its contractual obligations to its counterparties it would have defaulted. it would have been downgraded and the company would have collapsed and would have been to what they did in the worst financial storm in generations. there was no feasible way to selectively default on its counterparties without bringing the whole thing down. >> mr. secretary, we did not@@@) >> wheat backed up aig. >> that is not true. we acted to prevent their default because there was no other way to protect the system from the damage of that.
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the consequence of preventing the default was aig met its contractual obligations perdue cannot selectively default on contractual obligations without according collapse and downgrade. >> the consequence of what you have just described is you are telling me that these counterparty obligations, these financial instruments that are bought by their recent history parties, are going to be treated effectively like deposits in checking accounts and savings accounts. they ended up effectively with government guarantees for which they had never paid. >> there is no other way in the context of that storm to protect the economy from the failure. future, we do not want a system looking for work the, this is why we need resolution authority but we do not want investors in the future where the firms these particular firms to live with the expectation. that is the challenge by
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financial reform is so necessary. now, chairman, nothing would have made me happier in that context to have a different set of choices, but until all of the land the authority we have for the tragedy of the country we had no other choice. it's been a kid did have a choice before you moved in and that is it could pay 90 cents on the dollar, 85 cents on the dollar -- >> i don't know why this is so complicated -- >> it is complicated. >> but it's come down to the nature of choices. you either prevent default because the fault would be cataclysmic or you don't. when you provide -- when you prevent default, you are doing so so they can meet their obligations to everyone the of contractual obligations to. if you select redefault on any it will come crashing down. that is the consequence of the system we had going into this crisis. that's why we want to change. that's why we want to change the system. some of mr. secretary, i come from abroad of chapter 11. people negotiate all the time and they do not bring down their
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entire system. >> and you're a national expert on this based on the issue but that's why things are different. aig is effectively -- >> aig was not a bank. i'm out of time and i've done it to myself again. i apologize. >> this is very important to have come important debate to have. >> go at this, mr. secretary. >> [inaudible] [laughter] >> go ahead, mr. secretary. >> and you know this, i know you understand this. financial the institutions the concourse has recognized for a long time needed a different type of bankruptcy regime than we have four other companies. now, aig is not a bank. but in affected operate as a bank. it borrowed money, it operated on a leveraged and without capital to support that. for the same reason we have a different type of bankruptcy for banks for many, many decades. we need one for complex financial stopper lee just like banks. now, in bankruptcy you have lots of choices.
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you can negotiate all sorts of different treatments in this context and we still would be helpful for the country. we want is a bank type of resolution regime that gives the choices that we've had for banks and four in a sense colossi bankruptcy's the we did not have that for complex large financial institutions and that is what limited choices. >> we may disagree about whether or not we had it but we would certainly agree we do need a system in order to be about to liquidate large financial institutions. where we may draw a very sharp difference is whether or not we should ever be in the business of doing that after the fact, and going back and effectively guaranteeing transactions with mullen bank institutions -- >> we feel the same way -- suggests winder stand do you feel the same way about the fdic guarantees pimply september? because, because the guarantees -- again, you would never, ever want a country in a position you have to guarantees, temporary, whenever the price because, because of the moral hazard risk. but in a financial panic there
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is often no other way to stem the risk of much greater damage to the innocent. >> mr. geithner, there are consequences to doing that because now markets understand that you may at any point decide that anyone is large enough and that their debt should therefore be backed up by the u.s. taxpayer. >> well said, and no one feels more strongly about that, and that is why even in the midst of the steep crisis we propose sweeping reform that would give a better choice is in the future. i could not feel more strongly about that. >> thank you. i apologize to my fellow panelists. mr. atkins. >> no, it was a very fruitful discussion i thought. and i note next month we will be drawn into aig as a topic, and so i look forward to that as well. but i just wanted to turn back to i think part of the problem especially last year was predictability, transparency of
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the government's actions were. and also with respect to what balance sheets and other things work consisting of and that sort of made the marketplace itself on easy and i think that is part of the same thing i wanted to discuss now is the predictability of who gets what and who does what to whom and that is what i was trying to refer to as far as audit programs. i wasn't disparaging working man that there is a huge perception out there that other unions got a great deal out of that rescue package that was negotiated earlier this year. but that dovetails into the situation of small businesses that we've been talking about. a lot of the problem in today's business environment is an uncertainty as to what the future holds. the administration is talking about, and the congress is talking about huge tax increases, huge, new expensive health care plans, new owners
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environmental regulations being talked about. and then looming deficits of course, you know, far into the future, not even counting the off-balance sheet obligations in the united states government, which some people put at 100 to $0 billion or more. so nobody basically can plan for anything, and that affects borrowing, and that obviously can affect lending. so, at the same time now we are talking about the -- you were talking about the stigma of participating t.a.r.p. among some small banks, and people because of things like people are -- have been leery to purchase it in the private public partnership because they don't want to get close to any sort of government control of their business or influence. so i guess my main question is how are you going to inject more predictability into the system? you're talking about this vague notion of limiting aig to
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$550 billion or so and then focusing on small businesses and housing and other -- let can't remember the last part, anyway i will leave that to you. how exactly are you going to put these funds to work? what is the general plan? >> there is a cable attached to my testimony that gives a very detailed estimates on what we think a reasonable estimate as a future program is very clear and the programs have very clear and transparent positions and one of the things we did from the beginning is put the specific terms of any contract in the public domain for everyone to see. so i think that will be very effective and very clear and making sure what the limits are going to be on these programs and what the precise term is one to be. you are right that business across america still faced a lot of uncertainty, a lot of uncertainty how strong the recovery is going to be and they face some uncertainty with the
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name of the game is when to be going forward and that is one good reason why you the congress's plan to bring to closure the health care reform for the system and the broad changes ahead on energy policy and things like that. it will help reduce uncertainty and help improve confidence. businesses want to know what the rules of the game are, so i think i agree with you on that. you want to bring clarity as quickly as we can. >> i guess again going back to the resolution of 40 you're asking for i think that will just perpetuate the lack of clarity -- >> relative to what? again, let's think about the choice ahead. do you want to go back to a situation on which the united states of america comes into the worst crisis in the generations with no authority, no ammunition, no ability contain the damage? it cannot be good for us to a court that disaster again. >> but it can describe these particular on defining powers -- >> they are very well defined and they are carefully limited.
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they are more limited in some ways those exist today and the ones created that are new or modeled on a resolution of the regime established and tested for banks over the decades. >> i agree with the chairwoman that bankruptcy is probably the best >> bankruptcy a salles for squall site bankruptcy? >> i am talking about even beyond the banking system of firms that are not necessarily banks, but are deemed to be for some reason to big to fail or of a systemic risk and i think that is the thing we are concerned about. >> again, these are all about choices because i think many of us would share the basic objectives. it was not good for the country to allow a very large very risky complex institutions to operate and effectively as banks outside all the protections we put in place for banks in the wake of the great depression and crisis that preceded it.
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that was a terrible mistake. so institutions that effectively our thanks to chris, could imperil the system need to have constraints in the routt line -- >> that will get another round. mr. silvers. >> why don't you finish that sentence? maybe you've lost -- maybe you've lost it in the interim -- >> it's one of the hardest problems to solve, and people want to know what the boundaries are, but the scope of this is, but again, what caused this crisis, what made it so severe was we allowed an entire separate system of effectively banks operating on just without constraint on risk-taking that were adequate, you know, this is investment banks, aig, insurance companies, we could say frannie and friday, too, and without the protection we put in place to mitigate the panics. it was the classic mistake of the government. that is something we have to fix as part of that and better to
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manage failure with quasi banks and boasted of institutions. >> and mr. secretary is it your view the bill in the house to try understand the administration supports that that bill provides this fdic model quasi bankruptcy process with no provision for aig-like provisions other than to transition a field fornto an fdic like resolution process? is that -- is that a fair statement? >> that is a fair statement. >> let me just say that this issue that has just been gone through is great concern to me. i've looked closely at that bill. i thought earlier drafts were inadequate in respect of this and did run the risk of another aig. i think the bill in front of congress today is the right one and i think your leadership on this has been very helpful. let me return to the broad discussion about panics and
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bronze and so forth in the context of aig. i want to understand better the argument and you are making. are you saying that the reason why the counterpart to aig had to be made whole was not because the threat or the namib holding would fail but because of the threat that if anybody was not made a hole in a crowded derivatives transaction then there would be a broad disintermediation in derivatives markets? is that -- is that your concern? >> i think that you are mostly right but what we see it slightly differently. if any -- aig defaulted on any single counterparts in derivatives or any other contractual obligation that would force the generalized be felt, downgrade, the system would collapse. not because that collapse would have been cataclysmic for the system as a whole. >> default is an interesting term here. the fault is a form of legal term where the person who has the obligation asserts the party
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hasn't paid and in that circumstance -- in that circumstance perhaps can try to insist on payment and enforce bankruptcy. is it your view that in a negotiated hair cut would have had the same impact? because that would not have been the default. people negotiator cuts all the time between commercial parties. >> they do but that's the point. remember, this is not like there were three people. that had the total exposure of counterparties and derivatives to aig. there were tens and tens of counterparties on the derivatives, it may be hundreds. there were thousands of other counterparties at stake in this context. no one but have been willing to individually volunteer a concession without it being extended to all of the counterparties in similar positions. it is a simple thing. it's like flipping a switch. either the firm is able to pay
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and avoid default, or eight courts default and downgrading collapse. >> is your view -- is your@@@@@ >>sig- tarp seemed concerned -- >> the work -- the real world does not work this way. you cannot run a business on the hope that people will give up a set of contractual obligations. if they are unwilling to do it, you -- your only choice is that you not pay and take the consequences. >> your concern was the default of aig, not a broader run in the derivatives market? >> think about what happened after lehman brothers.
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lehman brothers failed. they defaulted. >> then you were saying that the default of aig - i want to understand whether you believe that the derivatives market is a market where everyone has to get 100 cents on the dollar all the time. n ain a financial panic generalized financial ron, if you see cascading defaults like this on any type of contractual financial contract, that will accelerate cannot mitigate the panic. again, nothing would have been better if there was a solution in place in this case where you could have negotiated instead about comes that left the taxpayer with less exposure of losses that has no realistic prospect of success in a financial panic of this magnitude. resolution of 40 but mix of the trees is a little bit easier. but there are no good choices in a panic like that. >> i would conclude after derivatives -- if derivatives are the kind of instrument that are having the kind of importance in the markets in which 100 cents on the dollar is
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necessary in a crisis we need to regulate them as such. >> and impose sweeping changes to how derivatives are treated and regulated under markets because of that risk. >> thank you. superintendent neiman? >> i would like to me in on the aig issue just to confirm that there is not necessarily a consensus on this viewpoint on the panel but also more importantly to delve into it a bit deeper. and also to encourage everyone to read the t.a.r.p. report not because necessarily the lessons learned but because it does outline the sequencing of defense that led up to and describe the transaction. mauney reading of the report says that once the government decided that aig was too big to fail they had no longer have leverage over negotiating on those haircuts. that is a different situation and was faced the municipal issuers months earlier. i think also indicated very
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clearly that the issues around violating contractual obligations once the government decided to prevent a default also treating u.s. counter priest offered him for an counterparties would have raised significant issues utilizing the supervisory powers of the federal reserve to use that leverage to force negotiation i think what also have raised significant concerns. and last the issue you raised of decreasing the downgrades, the impact that would have on the american tax payer and the global system. so you know, i would encourage everybody to read that report because of the descriptions and the kill switch to my knowledge were not clearly outlined up to the issuance of the report but take this agreement with lessons learned and in my opinion it is we did not have the right tools
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for resolution of an institution of that nature and that is why it is so critical that we have resolution authority to deal with systemically institutions. >> well said and i think you said they're right. i think it is important to recognize it is a good thing for the country and this is going to happen for years to come. people are going to pour over every decision we made. they are going to look very carefully tall of those judgments. it is of course harder to judge the benefit of hindsight whether it is possible and a lot of it is going to be hard for anyone to appreciate who has not lived through minute by minute what was happening in that acute series of financial panics with of good choices for us. our job was to make a set of choices among unpalatable deeply offensive basic choices and to do what was best for what we thought was best at that stage. but i respect the efforts to come back and look over this again. a lot will happen in the future. we are born to cooperate because the american people deserve to try to understand that, but
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again, understand no one can really appreciate the range of choices available at the time and that is one reason why we have to work so hard to make sure we have bitter twist in the future. resolution of 40 to allow the firms to fail without taxpayers being exposed to the risk of loss, and that we do countries undertaking the future that can help mitigate the moral hazard riss pc. >> before moving on to another subject i would like to use my remaining time. can you give us an update on aig particularly what we are reading in the press about issues of risk of losing individuals resulting from a compensation directives? >> there is risk of that as you expect and you've seen. i would see in general the management, the new board management institution are working very hard and
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effectively to strengthen the underlining insurance business is there for improving the prospect of the taxpayer being repaid and bringing down the risk in the financial product division that took the institution the edge of collapse. that has come down very dramatically overall scale of exposure and derivatives are about half of the peak level but that is the basic strategy. >> is it something that we should be concerned about at this time? the impact to the american tax payer if there is walls of critical employees? >> absolutely. i mean, we need people who are capable of running these businesses. the taxpayer making sure we maximize return on those actions we took require that there be capable people running these firms, these businesses. >> thank you. >> thank you, mr. treasury. our time is short so we will enter the lightning round and try to get in at least one more question.
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i know you need to leave -- >> i need to be somewhere else out 12:00. >> we understand you are here until 12. >> like five minutes before 12 because i need to be at my next thing at 12. >> i thought we were told we were ending at 12 that we have to for two hours. so, let me to ask the questions -- >> let me -- >> as the bank's -- we are talking about how to wind down t.a.r.p., here's my question to read the top of the guarantees for the money market expired september 18. that is one of the winding down of t.a.r.p.. but we jumped in, we the federal government, we, the treasury department, jumped in when the money markets were about to break the buck. now the money markets don't have any official guarantees. they don't pay anything for any guarantees that most of the market believes if the money market started to break the buck again there would be substantial government assistance. you describe the banks as leading t.a.r.p.. they are stronger, sure they are
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stronger. they paid back their debt, no restrictions under t.a.r.p., but they also bask in the glow of an implicit guarantees. after all we've held up the big sign that says those folks are worth saving no matter what. so my question is how do we wind out of implicit guarantees of the fact that the market assesses these institutions as stronger and capital as cheaper for these institutions for the specific reason that there is this implicit government guarantee? >> i.t. the only way to do it is to put in place financial reforms to the chief to outcomes. one is authority for the government to come string risk-taking more broadly and effectively in the future. that is necessary. it's not sufficient. and you need quasi bankruptcy authority that allows a credible risk that these firms can be failed, and wild more safely. i don't know a better way to do it. i worry about the risks you
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leave out. it's inherent in any successful effort to prevent financial fire. there's no way to put out financial fire without taking some risk you are going to hurt financial incentives in the way that you described. the only solution to that is to change the rules of the game. >> thank you, mr. secretary. mr. atkins? >> can i see something briefly prexy said at the beginning although in this agreement but i want to underscore -- t.a.r.p. was only one part of what helped bring growth back to the economy, stability back. t.a.r.p. would not have any effective without the guarantee but in fact without the fdic and broad measures of the financial squeeze by the fed and without the recovery act itself things did not turn. things did not improve, did not bottom until you have that full arsenal of policy responses in parallel. it wouldn't have worked without t.a.r.p.. t.a.r.p. was necessary and it
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was a part of the basic strategy. t.a.r.p. cannot claim the credit for all of the things improve in this case but it wouldn't have been possible without it. >> welcome you know, the recovery act as a whole nother issue and i don't have time to go into that one so i will leave that. there's two things i want to bring out. one is you are discussing nonbanks come on banking firms, would ever before. i do have to know many of them feared better than that huge banking institutions that had regulators and examiners living in their offices day after day. >> for symbol? >> hedge funds and others have less leverage, 221, three to one, than other sorts -- >> i need that point a lot that is in part because we were actually quite effective in making sure the institutions that provide leverage give them financing were much more constrained than they were and 98 for example. as the knicks will have to pick that one up. i just want to say that transparency i do believe is the answer ultimately.
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but one last thing i'd want to point out with respect to the housing issues, we had a hearing not long ago six folks one of whom brought up an issue as to eesa and the authority of the treasury to the programs you're doing now because the statute talks about how treasury will acquire assets, meaning, you know, loans or the underlying mortgages or the securitized assets. and so the programs are not geared toward that, and so wanted to -- >> the opinion on that? >> i would be happy to provide that. >> thank you. >> and mr. silvers is went to the last question. >> [inaudible] -- i would wave my last. >> mr. silvers. >> i've looked at the composition of the revenue. it's hard to look at the profits of the four largest banks over the last six quarters, and it
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appears that there is a trend toward interest income from loans declining slowly and income from securities revenue. again, revenue from security training. are you at all concerned about this, essentially the quality of earnings within the largest banks? >> i'm not at this stage. i think they are getting better, not worse. i think the most important thing to point out is what has happened to earnings across the financial system is a direct function of the fact not just the government did extraordinary things to save them from collapse, but that the markets are now opening up. firms are able to raise capital again, and the healthy process of repair, companies are able to go out and raise equity is a substantial source of revenue. that is what banks exist so it is a healthy thing obviously we look at this carefully because what we don't want to do is have a situation where the same type of risk that brought this to the edge of collapse start to
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reemerge again. >> thank you very much, mr. secretary. i want to say our characterization of the past may not always be in agreement but i think we are very much in agreement, at least i hope we are, that we cannot go this way again. there must never be t.a.r.p. 2.0. >> this isn't over yet. we still ought to fix what was broken, not just put reforms in place to prevent crisis in the future. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2009] >> you can watch this and other programs about tarp by visiting our website, c-span.org. there are links to the congressional oversight committees year and report as well as treasury secretary tim geithner letter to congress announcing the extension of tarp until october, 2010.
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>> today, the house oversight committee looked into last year's merger between bankamerica and merrill lynch. and the federal government involvement in the deal. you can watch it live on c-span 3 at 10:30 eastern time. you could watch video of the event live or at any time c- span.org. today on c-span, "washington journal" is next with your phone calls. live coverage of the house as members continue work on financial industry regulation. in about half an hour, we will discuss health care
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